Tobacco Excise - Current Rates and Impact of Recent Increases

Budgeted tobacco excise in 2011/12 was $1.3 billion, approximately 1.5% of total Crown revenue (excluding gains)[5]. Excise is approximately 50%-60% of the total GST-inclusive retail price of tobacco products. The current rate is $422.10 per 1000 cigarettes (or loose tobacco equivalent)[6].

In April 2010, Parliament enacted the Excise and Excise-equivalent Duties Table (Tobacco Products) Amendment Act, which provided for 3 step-increases in tobacco excise:

a 10% increase in excise on manufactured cigarettes, and a 25.4% increase in excise on loose tobacco (to equalise rates by weight with the new rate for manufactured cigarettes)

a 10% increase in addition to the annual CPI-based increase on 1 January 2011

a 10% increase in addition to the annual CPI-based increase on 1 January 2012

The charts below illustrate that these excise increases significantly raised the price of tobacco relative to other consumer goods for the first time since the late 1990s. Over the intervening decade, tobacco prices rose with general inflation as excise was indexed to the CPI.

Rise in the relative price of tobacco

* Dotted lines reflect forecast estimates.

CPI Basket Cigarette Price: Pack of 25

* Dotted lines reflect forecast estimates.

Overall tobacco consumption appears to have fallen following the recent excise increases. However, consumption estimates rely mainly on overall tobacco supply measures, which are highly volatile. It may take another year to get a stable picture of the demand impact of recent excise increases.

5. Tobacco volumes are forecast to fall 20% between the years ending June 2009 and June 2012 (PREFU 2011 forecast) following a 38% increase in price.

6. This is a larger apparent fall in demand than might be expected in the short-term. Most studies of tobacco consumption price sensitivity in developed countries estimate that each 1% increase in price will reduce consumption by between 0.25% and 0.5%[7].

7. Long-run consumption responses to real price increases are likely to be larger. Price increases immediately reduce consumption and induce quit attempts by current smokers, while over time uptake by new smokers is reduced.